Archives For June 2012

Mel Lefebvre and her partner, Tyler Bonnell, both face substantial student debt – but how much will the banks make off their student loans? Photo courtesy of Mel Lefebvre

Note: This article originally appeared on OpenFile Montreal, to which this blog post linked for the full text. Since September 2012 OpenFile’s website has been “on hiatus” and the news organization shut down due to financial insolvency. Therefore, the full text of article is now posted below.

Mel Lefebvre was on the way to starting her adult life.

After finishing her undergraduate degree in environmental studies, the Montreal native took up a graduate journalism program with an eye to writing in her field and starting to pay down her student debt. Then things took a twist.

She got pregnant. Or more precisely, she got pregnant with $23,000 in student debt.

“It’s really worrisome on a personal level because I’m spending most of my paycheque paying back my debt,” said Lefebvre, who is expecting her baby next January. “How am I supposed to make savings at the same time to make sure that I can pay the debt back, and be on maternity leave where I’m going to have a lesser income?”

“It’s scary.”

Though situations at graduation differ, Lefebvre’s debt portfolio is common among students who need financial assistance to pay for their post-secondary education: a student loan, a student line of credit and a credit card.

The most recent figures from the Quebec government’s student financial assistance agency, Aide financière aux etudes (AFE), show that in the 2009-2010 school year, students or former students were paying the interest on over $1.8 billion in loans.

Lefebvre got a loan of about $12,000 for her undergraduate studies, slightly less than the average undergraduate loan of $12,923 in 2010, the year she graduated. She also got a smaller $1,000 loan for her graduate program at Concordia University, plus $5,000 each on a line of credit and a credit card.

At 31-years-old, Lefebvre represents a growing cohort in the days of precarious employment: highly educated, highly indebted.

As with all government-backed student loans in Quebec, the interest on her $12,000 loan began accumulating a month after she completed her degree. After six months, she had to start repaying it.

Lefebvre’s lender, Royal Bank, estimates that at her current repayment rate, and at 3.5 per cent annual interest, she’ll have paid back the loan seven years from now, when her child is 6 years old.

Her $5,000 line of credit is likely to take even longer to pay back since she has a 4 per cent annual interest rate and no timetable, only paying “$50 now and then,” when she can.

Although Quebec’s banks are managing hundreds of millions of dollars in student loans each, it’s difficult to determine how much money they’re making from interest payments. Canadian banks aren’t required to publish that specific information, nor does the AFE collect it.

One indirect indicator is the amount of interest the government pays on student loans while students are still in school. The loans are only guaranteed by the government, not provided by them directly, a system in place since 1966. While students are still in school, the government pays the interest on their loans, provided by the banks.

In the low-interest climate of 2010, which persists today, Quebec paid $27 million in interest on $1.6 billion in loans. That’s a rate of return of about 1.7 per cent. Applied to the $1.8 billion in loans students were paying back in 2010, the rate would translate to about $30 million in interest for the banks.

Quebec’s top three lenders in 2010 were Desjardins ($957 million), Royal Bank ($247 million) and National Bank ($221 million), as reported by the AFE.

Desjardins was by far the biggest, holding nearly 60 per cent of the loans whose interest was being payed by the government in 2010. But the bank was unwilling to comment on how much they make from student loans. Royal Bank said that they wouldn’t release the figures for competitive reasons.

National Bank provided some insight by revealing that interest from student loans represents 0.008 per cent of their annual revenue. Applied to the total revenue for 2011 noted in their annual report (nearly $4.6 billion), student loan interest revenue stands at a measly $367,360. The figure could not be confirmed.

Personal finance expert and Globe and Mail columnist Rob Carrick has been researching and writing about student finances for years. Though the banks make some money from student loans, he doesn’t think they are a “profit centre” for the banks.

“They’re doing it because it’s needed and because it’s a way of establishing financial relationships with people that they can broaden out later on once people are through schooling, and start selling them products,” said Carrick.

As with tuition, student debt is higher outside Quebec. The national average weighs in at a bloated $27,000 for undergraduates.

But when it comes to student debt in Quebec, Carrick says the “banks aren’t the bad guys.”

So who is?

“You might argue that the real villain here is the job market,” said Carrick of the apparent dearth of “career-building first jobs.” The latest national youth unemployment rate of 14.3 per cent would seem to support his argument.

While students tattooed with red squares might argue the government is to blame, Lefebvre has focused on lightening her debt load, ridding herself of her high-interest credit card debt as quickly as possible. She also tackled her small graduate studies loan before the interest began to weigh on her.

But she still carries a $15,000 burden, working two part-time jobs and freelancing on the side, her partner still completing his doctorate with his own $10,000 debt on the way. In the meantime, the two prepare for their little bundle of joy to arrive free of charge, for now.